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A Preliminary Study of the
Impact of Tax Fairness Perception
Dimensions on Tax Compliance
Behaviour inAustralia
Grant Richardson*

Abstract
Tax fairness represents an important variable that can influence tax compliance
behaviour in society. Up until now, research in this area has mostly taken place in the
United States, however, tax fairness and non-compliance with tax laws represents
a major problem affecting revenue authorities all over the World including those
inAustralia.The major purpose of this study is to investigate the impact of tax
fairness perception dimensions on tax compliance behaviour inAustralia.A survey
questionnaire was administered to a sample of I05 postgraduate business students
at an Australian University during the 2003 year. Factor analysis identified five
tax fairness perception dimensions concerning: general fairness, tax rate structure,
exchange with the government self-interest and fairness of special provisions.
The impact of the tax fairness dimensions on tax compliance behaviour was then
assessed by OLS multiple regression analysis.The results showed that the tax fairness
dimensions relating to tax rate structure and self-interest were significant. Further
analysis confirmed the significance of these two dimensions on tax compliance
behaviour along with demographic variables relating to age and education. From
these preliminary results it seems that while tax fairness is a multidimensional
concept, it only has varying effects on tax compliance behaviour in Australia.

* Grant Richardson is an Assistant Professor in the Department of Accountancy, City

University of Hong Kong.
This article was accepted for publication on 15 April 2005.
407
408 (2005) 20 AUSTRALIAN TAX FORUM

I. Introduction
Considerable attention has been given in the field of fiscal psychology to
the influence of non-economic variables on tax compliance behaviour
(Cullis and Lewis, 1997, p. 311). In their review of the tax compliance
literature, Jackson and Milliron (1986, pp. 126-129) identified tax fairness
as one of the key variables which might affect tax compliance behaviour.
In fact, tax fairness has been recognised in surveys of American taxpayers
as the most significant objective of the United States income tax system
(Milliron et al., 1989; Copeland and Harmelink, 1995). Up until now,
research in this area has mainly taken place in the United States (Jackson
and Milliron, 1986, pp. 127-128; Richardson and Sawyer, 2001, pp. 291-
295), however, tax fairness and non-compliance with tax laws represents
a significant problem facing revenue authorities throughout the World,
including those in Australia.
The major purpose of this study is to investigate the impact of tax fairness
perception dimensions on tax compliance behaviour in Australia.The study
also has two subsidiary purposes. First, to determine whether Gerbing's
(1988) tax fairness perception dimensions represent universal tax fairness
perception dimensions across different Western jurisdictions. Second, to
investigate the impact of some key demographic tax compliance variables
relating to age, gender, education and occupation status (in conjunction
with tax fairness perception dimensions) on tax compliance behaviour in
Australia.
This study contributes to the tax compliance literature in a number of
important ways. First, this study investigates the associations between tax
fairness perception dimensions and tax compliance behaviour in Australia.
Hence, the study answers a recent call made by Richardson and Sawyer
(2001, p. 182) who have stated that: "... no research has examined the
link between these [tax fairness perception] dimensions and compliance
behaviour." Second, the study examines the possible existence of tax fairness
perception dimensions in a non-American jurisdiction. Thus, the study
answers an additional request made by Andreoni et al. (1998, p. 856) who
have argued that: "... there is a need for more empirical and institutional
research within jurisdictions outside the U.S." Finally, the study considers
the impact of some of the key tax compliance variables on tax compliance
behaviour in Australia. In so doing, the study adds to the scant empirical
literature in this area and answers the further call made by Tan and Sawyer
(2003, p. 454) who have recently stated that:"... there is a need for a greater
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 409

understanding of taxpayer compliance and for providing international and

cross-cultural comparisons."
The paper is organised as follows. First, a review of the theoretical
background in this area of tax compliance research will be undertaken,
thereby generating a series of research hypotheses. Second, the research
design and methodology to be applied in the study will be discussed.
Third, the empirical results of the study will be reported. Finally, the overall
conclusions and limitations of the study will be considered.

2. Theoretical background and hypotheses

2.1. NOTION OF TAX FAIRNESS

Public perception that the tax system is fair is critical if it is to rely for
its success on a significant degree of voluntary compliance. Indeed, a tax
system may be less successful to the extent that it is perceived by members
of a society to be unfair and inequitable (Vogel, 1974). This can generate
feelings by taxpayers to evade paying taxes (Spicer and Becker, 1980). It is
because of this assumed association with tax evasion that tax policy makers
are concerned about public perceptions of fairness (Gerbing, 1988). In
the United States, it has been suggested (Birnbaum, 1998) that the need
to increase the public's perception of fairness was a key motivating force
behind the introduction of the Tax Reform Act of 1986.
Moreover, a review of the tax compliance literature (e.g., Song and
Yarbrough, 1978; Hite and Roberts, 1991, 1992; Porcano and Price, 1992)
also shows tax fairness as an important variable that can influence tax
compliance behaviour. However, the findings of many of the tax compliance
studies in this area are inconsistent. Jackson and Milliron (1986, pp. 137-
138) have suggested that a major reason for this inconsistency is likely to
be the result of the multidimensional nature of fairness as a tax compliance
variable. In particular, Jackson and Milliron (1986, p. 137) have argued
that at least two major dimensions of tax fairness exist: the equity of the
exchange relationship between the government and the tax, and the equity
of the taxpayers burden vis-i-vis other taxpayers. Gerbing (1988) later
developed a survey instrument that was designed to supply structure to the
operational definition of tax fairness by identifying the various dimensions
of tax fairness.This research will be considered further below.
410 (2005) 20 AUSTRALIAN TAX FORUM

2.2.TAx FAIRNESS PERCEPTIONS AND TAX COMPLIANCE BEHAVIOUR

It is generally understood that tax fairness perceptions and tax compliance

behaviour are related. Specifically, research by Spicer (1974) found a
significant association between tax fairness and tax evasion in general, while
Song and Yarbrough (1978) discovered a significant association between
tax fairness and evasion, with 7 5 % of subjects stating that "ability to pay"
was more significant than "benefits". Moreover, Hite and Roberts (1991)
found that most taxpayers thought that "mildly progressive tax rates" were
most fair. Hite and Roberts (1992) also found that fairness was significantly
associated with perceptions of an improved tax system, and that tax fairness
and tax evasion were related. Finally, Porcano and Price (1992) discovered
that tax practitioners perceived the tax system as generally fairer than did
individual taxpayers, where "equality" was most frequently related to tax
fairness.
Alternatively, other studies have found no association between tax
fairness perceptions and tax compliance behaviour. For instance, Vogel
(1974) found no significant association between fairness perceptions and
tax evasion. Moreover, Porcano (1988) discovered that that the only tax
fairness dimension that correlated to tax evasion was "exchange with the
government". Finally, Antonides and Robben (1995) have found that
equity considerations were neither directly nor indirectly related to tax
evasion. However, as was originally suggested byJackson and Milliron (1986,
pp. 137-138) and more recently by Richardson and Sawyer (2 001, pp. 180-
181), a credible reason for this inconsistency is the multidimensional nature
of fairness as a tax compliance variable. Therefore, the major purpose of
this study is to investigate further the potential association between tax
fairness perceptions and tax compliance behaviour; taking into account the
multidimensional nature of tax fairness.
The above discussion leads to the formulation of the first research
hypothesis expressed in alternative form:
HI: There is a significant positive association between perceptions
of tax fairness and tax compliance behaviour in Australia.
2.3. TAX FAIRNESS PERCEPTION DIMENSIONS

Gerbing (1988) represented the first major study which developed

a multidimensional model of tax perceptions of fairness. Tax fairness
judgments, opinions about the fairness of the Tax Reform Act of 1986, and
demographic data were collected by Gerbing (1988) by way of a 56-item
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 411

mail survey of 225 taxpayers in the United States. Factor analysis of the tax
fairness judgement data identified five major underlying dimensions of tax
fairness perceptions: general fairness and distribution of the tax burden,
exchange with the government, attitude towards taxation of the wealthy,
preferred tax rate structure and self-interest. Gerbing's (1988) findings
therefore supported the idea that tax fairness was a multidimensional
concept.
In another study, Christensen et al. (1994) identified tax fairness
perception dimensions and determined how education could affect an
individual's perceptions of the identified tax fairness dimensions. A refined
survey instrument based on Gerbing (1988) was administered to 296
students enrolled in introductory tax courses at three universities in the
United States. Factor analysis of the questionnaire items identified five
core tax fairness perception dimensions in this research: overall fairness
of the tax system, fairness of personal payment level, exchange with the
government, tax rate structure and fairness of special provisions.
A further study in this area by Christensen and Weihrich (1996)
investigated and compared tax practitioners,' tax auditors' and tax
educators' perceptions of fairness of the Federal income tax system in the
United States. A modified survey instrument based on Gerbing (1988)
was administered to 141 tax practitioners, 186 tax auditors and 165 tax
educators. Factor analysis supported the presence of five major tax fairness
perception dimensions: exchange with the government, tax rate structure,
special provisions, overall fairness and personal fairness.
Overall, the results of both the Christensen et al. (1994) and Christensen
andWeihrich (1996) studies are consistent with the tax fairness perception
dimensions that Gerbing (1988) previously identified, which attests to the
soundness of her research. However, this research was conducted wholly
in the United States. From a recent review of the tax literature in this
area, it appears that no studies have been carried out in Australia regarding
this issue (Richardson and Sawyer, 2001; Tan and Sawyer, 2003).Therefore,
a subsidiary purpose of this study is to determine whether Gerbing's
(1988) tax fairness perception dimensions represent universal tax fairness
dimensions across different Western jurisdictions such as the United States
(as identified in previous research) and Australia.
412 (2005) 20 AUSTRALIAN TAX FORUM

2.4. DEMOGRAPHIC VARIABLES AND TAX COMPLIANCE BEHAVIOUR

Jackson and Milliron (1986) have conducted a review of the tax literature
that considered the impact of various demographic variables on the
tax compliance behaviour of individuals in society such as: age, gender,
education and occupation status.
Chronological age of the tax represents one of the most important
demographic variables investigated in the tax literature (Jackson and
Milliron 1986, p. 130). Studies in this area have found that older taxpayers
are normally more compliant than younger taxpayers (e.g., Tittle, 1980;
Hanno andViolette, 1996). For exampleTittle (1980) found that younger
taxpayers were more risk-seeking, were less sensitive to penalties, and also
reflected the social and psychological differences related to the period in
which they were raised. This discussion leads to the formulation of the
second research hypothesis expressed in alternative form:
H2: There is a significant negative (positive) association between
younger (older) taxpayers and tax compliance behaviour in
Australia.
Another key demographic variable is denoted by gender. Many past studies
have shown a positive association between gender and tax compliance
behaviour with the compliance level of female taxpayers being higher than
that of male taxpayers (e.g.,Vogel, 1974; Mason and Calvin, 1978). Also,
Jackson and Milliron (1986, p. 131) have argued that the gap between
males and females regarding compliance level may be closing over time
as a new generation of liberated women emerges. But, studies in this area
sinceJackson and Milliron (1986) tend to show otherwise (e.g.,Brooks and
Doob, 1990; Collins et al., 1992).This discussion leads to the formulation
of the third research hypothesis expressed in alternative form:
H3: There is a significant positive (negative) association between
female (male) taxpayers and tax compliance behaviour in
Australia.
Education represents yet another important demographic variable. Jackson
and Milliron (1986, p. 132) have argued that education has two important
elements: the general degree of fiscal knowledge and the specific degree of
knowledge regarding tax evasion opportunities. They claim that enhancing
the level of general fiscal knowledge improves tax compliance by means
of more positive perceptions of taxation, while increased knowledge of tax
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 413

evasion opportunities has a negative influence on tax compliance as it assists

non-compliance (ackson and Milliron, 1986, p. 132). Based on the education
characteristics of the participants in the survey sample in this study, (see Table
1 below) which assumed no extensive knowledge of the Australian tax system
and tax evasion opportunities, this discussion leads to the formulation of the
fourth research hypothesis expressed in alternative form:
H4:There is a significant positive association between the
education knowledge/level of taxpayers and tax compliance
behaviour in Australia.
One more notable demographic variable is represented by occupation
status, which has been regarded as a key tax compliance variable for many
decades. But, now that income tax laws cover a broad range of occupations,
the association between occupation status and tax compliance behaviour
is not as clear as in the past,' and the research lacks a clear direction. Some
studies have found a positive association between occupation status and
tax compliance behaviour (e.g., Wearing and Headley, 1997), while other
studies have found a negative association (e.g.,Vogel, 1974), and still others
have found no association at all (e.g., Brooks and Doob, 1990). Based on
the past research which does not show a clear direction, this discussion
leads to the formulation of the fifth research hypothesis expressed in non-
directional form:
H5: There is a significant association between the occupation
status of taxpayers and tax compliance behaviour in Australia.

3. Research method
3.1. SURVEY PROCEDURE AND SAMPLE

A tax survey questionnaire was administered to a sample of 105 postgraduate

business students in the context of regular class meetings at an Australian
University during the later part of the 2003 year. 2 The study was described

1 Where research by Sutherland (1949) has shown that people in higher status
occupations were found to be less compliant with tax laws than people in lower status
occupations.
2 The survey questionnaire was pilot-tested on five postgraduate business students.
After the pilot testing was carried out, ininor alterations were inade to the survey
questionnaire to improve its readability and general understanding. This procedure is
consistent with Dillnan (2000, pp. 140-147).
414 (2005) 20 AUSTRALIAN TAX FORUM

to students as a survey to evaluate the views of Australian taxpayers about

their income tax laws. Participant anonymity was assured by not asking
for personal identification on the survey questionnaires. Also, participants
were notified that neither the class instructor nor the Australian Taxation
Office (ATO) would have access to individual answers. In addition, there
was no intention to disguise the fact that this was a tax-focused study. The
participants included in the final sample were required to have some basic
experience in making individual tax compliance decisions and to complete
the survey in a dependable manner. Involvement in the survey was entirely
voluntary, and the participants received no class credit or other rewards for
completing the survey questionnaire. Finally, the sample size of the study
(n = 105) was found to be comparable to prior research in this area (e.g.,
Roberts, 1994; Hanno andViolette, 1996; Chan et al., 2000).

3.2. SURVEY QUESTIONNAIRE, MEASURES AND DEMOGRAPHIC DATA

The survey questionnaire included the following three sections:

* Section 1: tax fairness perceptions section (i.e. items
concerning the tax fairness perceptions ofAustralian taxpayers
of the income tax system);
* Section 2: tax non-compliance section (i.e. items about
hypothetical tax non-compliance by Australian taxpayers); and
* Section 3: demographic section (i.e. items on age, gender,
education and occupation status of Australian taxpayers).
A modified version of the Gerbing (1988) tax fairness perception scale was
used to collect information about tax fairness perceptions of the Australian
income tax system. Altogether, a 15-item scale was used with 5-point "very
fair-very unfair" (3 reverse coded) and "strongly disagree-strongly agree"
(12 coded) Likert-scale questions with discrete response categories. The
reliability of the tax fairness scale was assessed using Cronbach's Alpha.
The scale scored .74, which exceeds the minimum acceptable level of .70
recommended by Nunnally (1978).
In addition, a modified version of the non-compliance scale developed
byYankelovich et al. (1984) was used to gather data on hypothetical non-

3 These three tax fairness perception items were later recoded upon data entry to
be consistent with the other twelve items of the tax fairness perceptions section of
the survey questionnaire and also to be consistent with the hypothetical tax non-
compliance/compliance format of the survey questionnaire.
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 415

compliance behaviour in Australian in the survey questionnaire. The

modified scale contains four items reflecting rationales for tax cheating.
Five-point Likert scale questions (scaled from strongly agree to strongly
disagree) with discrete response categories were used in the survey
questionnaire regarding this issue. The Cronbach's Alpha for the scale
was .78. The final section of the survey questionnaire asked participants
to complete a series of demographic questions concerning age, gender,
education and occupation status. These demographic characteristics of the
sample are reported in Table 1.

Table 1: Summary of Demographic Data

Variable Responses Percent (%)
Age
Under20 0 0
20-29 65 61.9
30-39 23 21.9
40-59 15 14.3
60 or over 2 1.9
Total 105 100
Gender
Male 54 51.4
Female 51 48.6
Total 105 100
Education Years (startingwith primary school)
I I years or less 3 2.9
12-13 years 4 3.8
14-15 years 16 15.2
16-17 years 37 35.2
18 years or over 45 42.9
Total 105 100
Occupation Status
No paid job (including full-time students) 4 3.8
Unskilled or semi-skilled manual worker 9 8.6
Generally trained office worker or secretary 22 20.9
Vocationally trained person 3 2.9
Academically trained professional or equivalent (but non- 40 38.1
managers)
Supervisor of one or more subordinates (i.e. non-managers) 21 20.0
Manager of one or more managers 6 5.7
Total 105 100
416 (2005) 20 AUSTRALIAN TAX FORUM

Concerning gender, 5 1. 4 % of the survey respondents were male, while

48 6
. % of the survey respondents were female. Moreover, a majority of
the sample consisted of people with an age in the range of 20-29 (6 1. 9 %),
an education level of over 16 years (combining two education levels
totaling 78.1%), and who were in full-time employment (96.2%) as either
academically trained professionals or supervisors/managers (combining
three categories totaling 63.8%). These demographic data show that the
participants were generally younger, well-qualified and paid personal
income tax. Finally, the 15-item tax fairness perception scale and the 4-
item non-compliance scale are reported in Appendix A and B of the paper,
together with the means and standard deviations for the individual items
that comprise each of the two scales.

4. Results
4.1. FACTOR ANALYSIS OF TAX FAIRNESS PERCEPTIONS

To measure and empirically verify the tax fairness perceptions, a correlation

matriX4 was computed and principal component factor analysis (with
varimax rotation) was then utilised to summarise the structure of the 15-
item tax fairness scale. The results of the factor analysis are reported in
Table 2.
The factor analysis identified the presence of five tax fairness perception
dimensions (with eigenvalues > 1).' Overall, the dimensions accounted for
64.20% of the total variance. The five dimensions' (in decreasing order of
importance) are represented by:
* Dimension 1: general fairness, which accounts for 21.50%
of the variance. This dimension consists of three items that
provide a general representation of the overall fairness of the
Australian tax system. This dimension is composed of questions
that relate to fairness for the average tax taxpayer, fairness for
the taxpayer and fairness of the distribution of the tax burden;

4 The Bartlett test of sphericity (Chi-square = 420.31) was significant at p = .00 and the
Kaiser-Meyer-Olk ineasure of sampling adequacy was = .67, denoting a high level
of factorability of the correlation matrix (Hair et al., 1998, pp. 99-100).
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 417

Table 2: Factor Analysis Results for Tax Fairness

Perceptions
Question Dimension I Dimension 2 Dimension 3 Dimension 4 Dimension 5
Q2 .90
QI .85
Q3 .75
Q12 .83
Q10 .82
QII .81
Q13 .87
Q15 .83
Q14 .66
Q7 .72
Q6 .66
Q5 .47
Q8 .85
Q9 .62
Eigenvalue 3.22 2.24 1.75 1.40 1.02
Percent of 21.50 14.90 11.70 9.30 6.80
Variance
Cumulative 21.50 36.40 48.10 57.40 64.20
Percent
Coefficient .81 .88 .78 .75 .73
Alpha

Notes: Dimension 1 = general fairness, Dimension 2 = tax rate structure, Dimension 3

= exchange with the government, Dimension 4 = self-interest and Dimension 5
fairness of special provisions. Only dimension loadings > .40 are displayed.

Dimension 2: tax rate structure, which accounts for 14 . 9 0%

of the variance. This dimension comprises three items that
are concerned with the tax rate structure of the Australian tax

5 Hair et al. (1999, p. 103) suggests that factors having eigenvalues greater-than 1 are
considered to be significant, while all factors with eigenvalues less-than 1 are regarded
as insignificant and should be disregarded.This process was applied here, indicating that
a five-factor solution was most appropriate. Also, visual inspection of the Scree plot of
the eigenvalues confirms the presence of five dimensions.
6 Hair et al. (1999, p. 111) advocates that factor loadings greater-than .40 are considered
to meet an acceptable level of significance to interpret factors. Hence, this cut-off point
was used for evaluating the factor loadings for the five dimensions. This cut-off point
is also consistent with recent tax research by Murphy (2004, p. 320).
418 (2005) 20 AUSTRALIAN TAX FORUM

system. This dimension is made up of questions that relate to

ability to pay, progressive tax rates and proportional tax rates;
* Dimension 3: exchange with the Government, which accounts
for 11.70% of the variance. This dimension consists of three
items that directly relate to the benefits received by Australian
taxpayers from the Australian Federal Government in exchange
for the taxes paid in the tax system;
* Dimension 4: self-interest, which accounts for 9 . 3 0% of
the variance. This dimension comprises three items related
to whether the amount of tax the individual Australian tax
personally pays is too high both in general terms and vis-i-vis
other Australian taxpayers; and
* Dimension 5: fairness of special provisions, which accounts
for 6 .8 0% of the variance.This dimension contains two items
which all deal with special tax provisions that are accessible to
only a limited number ofAustralian taxpayers.
The five dimensions were then tested for reliability using coefficient alpha.
The coefficient alphas reported in Table 2 show that all five dimensions
exceed .70, which is the level of reliability recommended by Nunnally
(1978) for exploratory studies. In general, the results of this research are
consistent with the tax fairness perception dimensions that were identified
in Gerbing's (1988) research. Thus, it appears from this research that
Gerbing's (1988) tax fairness perception dimensions represent universal
tax fairness perception dimensions across different Western jurisdictions,
including Australia.

4.2. INFLUENCE OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX

COMPLIANCE BEHAVIOUR

(i) Tax compliance behaviour measurement and verification

As mentioned earlier, a modified version of the non-compliance scale
developed by Yankelovich et al. (1984) was used to collect data about
hypothetical tax non-compliance behaviour in Australia (i.e. four items
dealing with tax cheating rationales). The reliability of the 4-item non-
compliance scale was found to be satisfactory (Cronbach's alpha = .78). A

7 One item that did not load on to any of the factors was item 4, which deals with
"personal fairness of the tax system." It had a factor loading of less-than the cut-off
point of .40, which is not acceptable for further analysis.
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 419

correlation matrix" was then computed and principal component factor

analysis was carried out to check the underlying factor structure of the
scale. A single factor solution was found to be the most appropriate, which
is consistent with prior research (e.g., Roberts, 1994, p. 75). It accounted
for 60.10% of the variance and had an eigenvalue of 2.40.The factor scores
from this single factor solution of the 4-item non-compliance scale will
be used as the measure of tax compliance behaviour (i.e. the dependent
variable) in the statistical analysis that immediately follows.
(ii) Summary descriptive statistics and univariate tests
Summary descriptive statistics for the tax fairness perception and tax
compliance behaviour variables are presented in Table 3, while the
intercorrelations among the variables are reported in Table 4.

Table 3: Descriptive Statistics

Tax Fairness Perception Dimensions and Tax Compliance
Behaviour
Actual Range Theoretical Range
Standard
Variable Mean Staion Min Max Min Max
Deviation
GENF 0 1.00 -2.02 2.38 1.00 5.00
TRATE 0 1.00 -2.66 2.60 1.00 5.00
EXCH 0 1.00 -2.64 1.75 1.00 5.00
SELFI 0 1.00 -2.97 1.70 1.00 5.00
SPECP 0 1.00 -2.28 3.16 1.00 5.00
TCOMP 0 1.00 -2.13 2.81 1.00 5.00
Notes: GENF = general fairness, TRATE = tax rate structure, EXCH = exchange with
the government, SELFI = self-interest, SPECP fairness of special provisions and
TCOMP = tax noncompliance.

8 The Bartlett test ofsphericity (Chi-square = 109.40) was significant at p = .00 and the
Kaiser-Meyer-Olkin measure of sampling adequacy was = .75, suggesting a high level
of factorability of the correlation matrix.
420 (2005) 20 AUSTRALIAN TAX FORUM

Table 4: Pearson Correlation Matrix

Tax Fairness Perception Dimensions and Tax Compliance
Behaviour
Variable GENF TRATE EXCH SELFI SPECP TCOMP
GENF 1.00
TRATE - 1.00
EXCH - - 1.00
SELFI - - - 1.00
SPECP - - - - 1.00
TCOMP -.03 .17:: -.01 .23*** .03 1.00
Notes: GENF = general fairness,TRATE = tax rate structure, EXCH = exchange with
the government, SELFI = self-interest, SPECP fairness of special provisions and
TCOMP = tax noncompliance.
**, *** p < .10 one-tailed test, p < .05 one-tailed test, p < .01 one-tailed test,
respectively.

The results reported in Table 4 show that two of the tax fairness dimensions
are significantly correlated with tax compliance behaviour (with predicted
signs). First, the tax rate structure dimension is significant at the p < .05
level. Second, the self-interest dimension is significant at the p < .01 level.
None of the other tax fairness dimensions were found to be significantly
correlated to tax compliance behaviour on a bivariate basis. These results
provide some preliminary support for hypothesis one. However, the results
of the Ordinary Least Squares (OLS) multiple regression analysis should
also be considered.
(iii) Multivariate tests
To consider the potential associations between the five tax fairness
perception dimensions and tax compliance behaviour, the data were
analysed using OLS multiple regression analysis.' Therefore, the following
regression model is estimated for each survey participant i:
TCOMPi o + f 1GENFi + P2 TRATEi + PEXCHi + P4SELF 1i +
PfSPECPi +i (1)
9 Diagnostic tests were carried-out to ensure that the assumptions for the use of OLS
multiple regression analysis were satisfied. Specifically, the normal probability plot of
residuals showed that the nornality assumption was fulfilled.The plots of the residuals
against the corresponding fitted (predicted) values showed that the assumptions of
homogeneity of variance of residuals and the propriety of the linear models were not
violated. Finally, the variance inflation factors indicated that none of the independent
variables had a rnulticollinearity problem.
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 421

The dependent variable, TCOMP,, is the 4-item noncompliance scale

factor score, GENF, is the general fairness dimension score, TRATE, is
the tax rate structure dimension score, EXCH, is the exchange with the
government dimension score, SELFli is the self-interest dimension score,
SPECPi is the fairness of special provisions dimension score, and Ei is
the residual term. The results of the OLS multiple regression analysis are
reported in Table 5.

Table 5: OLS Regression Model Results

Tax Fairness Perception Dimensions Model
Variables Predicted Sign Unstandardised Standard Errors T-statistics
Beta Coefficients
GENF + -.03 .10 -.30
TRATE + .17 .10 1.70**
EXCH + -.01 .10 -.10
SELFI + .24 .10 2.40***
SPECP + .03 .10 .30

F statistic 1.83
P value p < .05
Adjusted R2 .10
Notes: GENF general fairness,TRATE = tax rate structure, EXCH = exchange with
the government, SELFI = self-interest and SPECP = fairness of special provisions.
*, *** p < .10 one-tailed test, p < .05 one-tailed test, p < .01 one-tailed test,
respectively.

Table 5 shows that the regression model is significant at the p < .05 level
(F Statistic = 1.83). In addition, the adjusted R2 of the regression model
is .10.The regression model's explanatory power is relatively low," yet this
result is not surprising asJackson and Milliron (1986,p. 126) have suggested
that there are at least 14 key variables that can have some influence on tax
compliance behaviour, while so far, this study has focused only on one:
tax fairness. Including some other key (demographic) variables in another

10 Another regression model was estimated using a summated scale measure ofTCOMP
as the dependent variable in keeping with Hanno and Violette (1996). These results
were found to be comparable to the results reported in Table 5, hence, these alternate
results will not be presented.
11 This is also consistent with the results found in other past regression modeling research
(e.g., Elfers et al., 1992, p. 563; Murphy, 2004, p. 320).
422 (2005) 20 AUSTRALIAN TAX FORUM

regression model could improve the explanatory power. This issue will be
addressed below.
Table 5 also shows that two of the tax fairness dimensions are significant
in the regression model (with predicted signs). First, the tax rate structure
dimension is significant at the p < .05 level. This result is consistent
with the findings of prior studies that have found positive associations
between tax rate structure and tax compliance behaviour (e.g., Hite and
Roberts, 1991). Second, the self-interest dimension is significant at the p
< .01 level. It seems that self-interest influences how individual taxpayers
respond to tax compliance or non-compliance. Hence, where individual
taxpayers perceive that their personal tax interests are not compromised,
they are more likely to comply with tax laws. None of the other three tax
fairness dimensions are found to be significant, thus, hypothesis one is only
partially supported by the results. From these results it appears that while
tax fairness is a multidimensional concept, it only has varying effects on
tax compliance behaviour. These results provide compelling support for
Jackson and Milliron's (1986, pp. 137-138) view that the inconsistent past
research findings in this area might be due to the multidimensional nature
of tax fairness as a tax compliance variable.

4.3. IMPACT OF DEMOGRAPHIC VARIABLES ON TAX COMPLIANCE BEHAVIOUR

(i) Demographic variable specification

Demographic data relating to age, gender, education and occupation
status were collected in the survey questionnaire to consider the impact
of demographic variables on tax compliance behaviour. As they represent
non-metric data, they must be converted to dummy variables to be used in
OLS multiple regression analysis (Hair et al., 1998, p. 167) as follows:
* Age is denoted by two dummy variables, representing two
of the major age groups in the survey sample (1 if the survey
participant falls in the particular age group, 0 otherwise). These
two major age groups are: 20-29 and 30-39. The under 20, 40-
59 and 60 or over age groups were excluded from the analysis
due to small sample sizes;
* Gender is represented as a single dummy variable (1 if the
survey participant is female, 0 otherwise);
* Education is denoted by two dummy variables, signifying two
of the major education classifications in the survey sample
(1 if the survey participant falls in the particular education
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 423

classification, 0 otherwise).These two major education

classifications are the education groups: 16-17 years and 18
years or over. Education groups with small sample sizes (i.e. 11
years or less, 12-13 years and 14-15 years) were excluded from
the analysis; and
Occupation status is represented by a series of dummy variables
representing three of the major employment classifications
in the survey sample (1 if the survey participant falls in the
particular employment group, 0 otherwise).These three major
occupation status classifications are: generally trained office
worker or secretary, academically trained professional or
equivalent (but non-managers) and supervisor of one or more
subordinates (i.e. non-managers).The occupational groups
represented by: unskilled or semi-skilled manual workers,
vocationally trained persons and manager of one or more
managers were excluded from the analysis due to small sample
sizes. Finally, the no paid job (including full-time students)
occupational group was also excluded from the analysis as this
specific group of people was not likely to have paid personal
income taxes during the survey period.
(ii) Summary descriptive statistics and univariate tests
Summary descriptive statistics for the demographic variables are presented
in Table 6, while the intercorrelations between the demographic variables
and tax compliance behaviour are shown in Table 7.

Table 6: Descriptive Statistics

Demographic Variables
Actual Range Theoretical Range

Variable Mean Standard Min Max Min Max

Deviation
AGEI .62 .49 0 I 0 I
AGE2 .22 .42 0 I 0 I
GEND .49 .50 0 I 0 I
EDUC I .35 .48 0 I 0 I
EDUC2 .42 .50 0 I 0 I
OCCUI .21 .41 0 I 0 I
OCCU2 .38 .49 0 I 0 I
OCCU3 .20 .49 0 I 0 I
424 (2005) 20 AUSTRALIAN TAX FORUM

Notes:AGE1 = 20-29 age group,AGE2 = 30-39 age group, GEND = gender, EDUC1 =
16-17 years education group, EDUC2 = 18 years or over education group, OCCUl
= generally trained office worker or secretary group, OCCU2 = academically trained
professional or equivalent (but non-inanagers) group and OCCU3 = supervisor of
one or more subordinates (i.e. non-inanagers) group.

Table 7: Pearson Correlation Matrix

Demographic Variables and Tax Compliance Behaviour
Variable AGEI AGE2 GEND EDUCI EDUC2 OCCUI OCCU2 OCCU3 TCOMP
AGEI 1.00
AGE2 .68:: 1.00
GEND .06 -.10 1.00
EDUCI .13* -.10 .08 1.00
EDUC2 -.09 .11 -.01 .63*** 1.00
OCCUI .26::: -.21*** -.11 -.04 -.06 1.00
OCCU2 -.
19# .22 -.02 -.05 .05 -.41** 1.00
OCCU3 -.
25: .31*** -.10 -.02 .06 -.26:** - 39 m 1.00
TCOMP -.
29: .25*** -.07 .06 .01 -.25ttt .12 .12 1.00
Notes:AGE1 20-29 age group,AGE2 = 30-39 age group, GEND = gender, EDUC1
16-17 years education group, EDUC2 = 18 years or over education group, OCCUl
= generally trained office worker or secretary group, OCCU2 academically trained
professional or equivalent (but non-inanagers) group, OCCU3 supervisor of one
or more subordinates (i.e. non-inanagers) group and TCOMP tax nonconpliance.
**, *** p < .10 one-tailed test, p < .05 one-tailed test, p < .01 one-tailed test,
respectively.
, t p < .10 two-tailed test, p < .05 two-tailed test, p < .01 two-tailed test,
respectively.

The results in Table 7 show that three of the eight demographic variables
are significantly correlated with tax compliance behaviour. First, the 20-
29 years age demographic variable is significant at the p < .01 level (with
predicted sign). Second, the 30-39 years age variable is also significant at the
p < .01 level (with predicted sign).These results provide some preliminary
support for hypothesis two. Finally, the generally trained office worker
or secretary occupation status demographic variable is significant at the
p < .01 level (with no predicted sign). This result provides some initial
support for hypothesis five. None of the other demographic variables were
found to be significant.
(iii) Multivariate tests
To investigate the potential associations between the demographic variables
(in conjunction with the tax fairness perception dimensions) and tax
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 425

compliance behaviour, the following OLS regression model is estimated

for each survey participant i:
TCOMPi = ao + PGENF, + PtTRATE, + j3EXCH + j 4SELFI, +
j3SPECPi + j 6AGE11 + 1 7AGE 2i + IGEND + P9EDUCi + 10EDUC),
+ fzlOCCUi + P 120CCUi + VOCCUsi + Ei (2)
The dependent variable, TCOMPi,' is the 4-item noncompliance scale
factor score, GENF, is the general fairness dimension score, TRATE is
the tax rate structure dimension score, EXCH is the exchange with the
government dimension score, SELFli is the self-interest dimension score,
SPECPi is the fairness of special provisions dimension score,AGE1 is a series
of dummy variables representing two age groups in the survey sample (1 if
the survey participant falls in the particular age group, 0 otherwise), GENDi
is a dummy variable (1 if the survey participant is female, 0 otherwise),
EDUCi is a series of dummy variables denoting two of the major education
classifications in the survey sample (1 if the survey participant falls in the
specific education classification, 0 otherwise), OCCUi is a series of dummy
variables representing three of the major employment classifications in the
survey sample, (1 if the survey participant falls into the specific occupation
status, 0 otherwise) and F- is the residual term. The results of the OLS
regression analysis are reported in Table 8.
Table 8 shows that the regression model is significant at the p < .05 level
(F Statistic = 1.73).Moreover, the adjusted R' of the regression model is .19.
This represents a major improvement in the regression model's explanatory
power from the first regression model (see equation 1 above). Regarding
the significance of the tax fairness dimensions in the regression model,
Table 8 shows that two of them are significant (with predicted signs): the
tax rate structure dimension which is significant at the p < .05 level and
the self-interest dimension which is significant at the p < .01 level. These
results are consistent with the initial regression model findings and are not
sensitive to Australian taxpayer demographics. Hence again, hypothesis one
is only partially supported by the results.

12 See footnote 10 above.

426 (2005) 20 AUSTRALIAN TAX FORUM

Table 8: OLS Regression Model Results

Tax Fairness Perception Dimensions/Demographic
Variables Model
Variables Predicted Sign Unstandardised Standard Errors T-statistics
Beta Coefficients
GENF + -.04 .10 -.40
TRATE + .17 .10 1.70*
EXCH + -.04 .10 -.40
SELFI + .21 .10 2.10**
SPECP + -.05 .10 -0.50
AGEI - -.36 .27 -1.33*
AGE2 + .19 .32 .59
GEND + -.02 .20 -.10
EDUC I + .35 .27 1.30*
EDUC2 + .22 .26 .85
OCCU I ? -.32 .31 -1.03
OCCU2 ? .11 .27 .40
OCCU3 ? .06 .32 .19

F statistic 1.73
P value p < .05
Adjusted R2 .19
Notes: GENF general fairness, TRATE = tax rate structure, EXCH exchange with
the government, SELFI = self-interest, SPECP = fairness of special provisions,AGE1
= 20-29 age group, AGE2 30-39 age group, GEND = gender, EDUC1 = 16-17
years education group, EDUC2 = 18 years or over education group, OCCUl =
generally trained office worker or secretary group, OCCU2 = academically trained
professional or equivalent (but non-inanagers) group and OCCU3 = supervisor of
one or more subordinates (i.e. non-inanagers) group.
**, *** p < .10 one-tailed test, p < .05 one-tailed test, p < .01 one-tailed test,
respectively.

Concerning the significance of the demographic tax compliance variables,

Table 8 shows that two of them are statistically significant (with predicted
signs), but only at the p < .10 level. Specifically, in relation to the age
dummy variables, the 20-29 age dummy variable is marginally significant
at the p < .10 level, which is consistent with the findings of prior studies
that show that younger taxpayers are usually less compliant that older
taxpayers (e.g., Hanno andViolette, 1996). However, the 30-39 age dummy
variable is not significant, hence, hypothesis two is only partially supported
by the results. For the gender dummy variable, this is not significant, hence,
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 427

hypothesis three is not supported by the results and is rejected.With respect

to the education dummy variables, the 16-17 years education dummy
variable is marginally significant at the p < .10 level, which is consistent
with prior research findings (e.g., Wearing and Headley, 1997). But, the
18 years or over dummy variable is not significant, thus, hypothesis four is
not fully supported by the results. Finally, for the occupation status dummy
variables, none of them were found to be significant, hence, hypothesis
five is not supported by the results and is rejected. In general, the results
concerning the demographic variables are marginal. Only partial support
is found for hypothesis two and hypothesis four, while hypothesis three
and hypothesis five are rejected. But, it should be noted that these results
are similar to those obtained in prior studies as observed by Jackson and
Milliron (1986) and Richardson and Sawyer (2001).

5. Conclusions and limitations

The major purpose of this study was to investigate the impact of tax
fairness perception dimensions on tax compliance behaviour in Australia.
The results showed that tax fairness perception dimensions relating to
tax rate structure and self-interest had significant associations with tax
compliance behaviour. Though, none of the other tax fairness perception
dimensions were found to be significant. Hence, hypothesis one was only
partially supported by the results. From these findings it seems that while
tax fairness is a multidimensional concept, it only has varying effects on tax
compliance behaviour in Australia.This represents an important empirical
finding not evident in previous research. This might help to explain the
inconsistent research findings concerning the association between tax
fairness perceptions and tax compliance behaviour in the past. Future
research about this issue could be undertaken in other Western jurisdictions
to substantiate the results found in this section of the study.
Another purpose of this study was to determine whether Gerbing's
(1988) tax fairness perception dimensions represented universal tax fairness
dimensions across different Western jurisdictions such as Australia. On
the whole, the results were fairly consistent with the major tax fairness
perception dimensions that were originally identified in Gerbing's (1988)
research. It seems that Gerbing's (1988) tax fairness perception dimensions
represent universal tax fairness perception dimensions across different
Western jurisdictions.Again, future research concerning this issue could be
428 (2005) 20 AUSTRALIAN TAX FORUM

performed in other Western jurisdictions to corroborate the results found

in this part of the study.
The final purpose of this study was to investigate the impact of
demographic variables on tax compliance behaviour in Australia. While
the results for the tax fairness dimensions were consistent with the initial
regression model findings outlined above, the demographic variable results
were found to be lacking. Only two of the eight demographic variables (i.e.
those relating to the 20-29 age group and the 16-17 years education group)
were found to be statistically significant. Hence, only hypothesis two and
hypothesis four were partially supported by the results, while hypothesis
three and hypothesis five were rejected. It seems that demographic variables
only have a minor impact on tax compliance behaviour in Australia.This is
an important empirical finding which is consistent with previous research
in this area. Future research about this issue could be undertaken in other
Western jurisdictions to confirm the results found here.
Overall, the empirical findings of this study emphasise an important idea
originally advanced byJackson and Milliron (1986, p. 126). Specifically, that
tax compliance behaviour is a multifaceted concept where many factors
such as behavioural, demographic and economic factors are likely to have
an impact on the tax compliance behaviour decisions of individuals.These
factors either alone or together are likely to have variable impacts on tax
compliance behaviour, and these various impacts should be investigated
carefully. It is hoped that this study presents some early support for this
important idea.
The study has several limitations. First, misunderstood questions could
affect the validity of the results (Dillman, 2000). Pilot testing and modifying
questionnaires used in previous research alleviated but did not necessarily
eliminate this potential problem in the research design.A second limitation
is that the survey participants were all postgraduate business students and
hence, the results may not be generalisable to the Australian tax population
as a whole. However, prior research (e.g., Dyckman, 1964; Hofstedt, 1972;
LaTour et al., 1990) has found no significant differences in decision making
involving students and other types of survey participants.Also, much of the
past research in this area (e.g., Christensen et al., 1994; Christensen and
Weihrich, 1996; Tan, 1998; Chan, 2000) has successfully used university
students as survey participants without prejudicing the results. Indeed,
given the research funding constraints for this study, it became necessary
to use tax-paying postgraduate business students as the survey participants.
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 429

A third limitation is that while this study focused on the five tax fairness
dimensions identified by Gerbing (1988), there could be other dimensions
that were not identified by this study. Future research could be attempted
in other jurisdictions to see if any other tax fairness perception dimensions
exist and how these other dimensions affect tax compliance behaviour.
A fourth limitation is that the tax compliance behaviour of the survey
participants was measured in terms of hypothetical tax compliance
behaviour instead of actual non-compliance behaviour. But, prior research
(e.g., Hite, 1988; Roberts, 1994; Hanno and Violette, 1996; Chan et al.,
2000) has shown that the hypothetical tax compliance behaviour measures
are a reliable substitute for actual non-compliance behaviour of individuals.
In fact, information provided by subjects on actual compliance behaviour
is found to be sensitive and potentially incriminating, and likely to be
misrepresented by taxpayers (Hessing et al., 1988).
Despite these limitations, it is suggested that this study has made a
novel contribution to the sparse empirical tax compliance literature in a
jurisdiction outside of the United States. The study has achieved this in a
number of ways. First, it considered the existence of tax fairness perception
dimensions in Australia. Second, it investigated associations between tax
fairness perception dimensions and tax compliance behaviour in Australia.
Third, it examined the impact of some key demographic variables on
tax compliance behaviour in Australia. Future research is encouraged in
this area in other jurisdictions to assist cross-culture comparisons, and to
obtain a better understanding of how the key tax compliance variables
influence the tax compliance behaviour of individual taxpayers in different
jurisdictions.
430 (2005) 20 AUSTRALIAN TAX FORUM

Appendix A

Extracts from the 15-Item Tax Fairness Perceptions Scale

Here are some questions concerning personal attitudes towards income
taxes and the income tax system. (Please circle one answer in each line
across as to how you feel about income taxes and the income tax system):
1 =Very fair; 2 = Fair; 3 = Neither fair nor unfair; 4 = Unfair; or 5 =Very
unfair.
1. For the average tax, I think that the income tax system is: (1) very fair ... (5)
very unfair [mean = 2.94; standard deviation = 1.01].
2. For me personally, I believe that that the income tax system is: (1) very fair ...
(5) very unfair [mean = 2.90; standard deviation = 1.94].
3. Generally, I believe that the manner in which the income tax burden is
distributed across taxpayers is: (1) very fair ... (5) very unfair [mean = 2.57;
standard deviation = .98].

Here are some more questions concerning personal attitudes towards

income taxes and the income tax system. (Please circle one answer in each
line across as to how you feel about income taxes and the income tax
system): 1 = Strongly disagree; 2 = Disagree; 3 = Neutral; 4 = Agree; or 5
= Strongly agree.
4. I believe that the income tax system is the fairest kind of system that the
government could use to collect revenue: (1) strongly disagree ... (5) strongly
agree [mean = 2.93; standard deviation = 1.02].
5. Current tax laws require me to pay more than my fair share of income taxes:
(1) strongly disagree ... (5) strongly agree [mean = 3.17; standard deviation
1.08].
6. Fairness requires that different kinds of income such as wages, interest and
income from investments should all be taxed the same way: (1) strongly disagree
... (5) strongly agree [mean = 2.70; standard deviation = 1.15].
7. People whose income is about the same as mine should pay the same amount
of income tax, regardless of what kind of investments they make, how many
dependents they have or what their other financial obligations are: (1) strongly
disagree ... (5) strongly agree [mean = 2.94; standard deviation = 1.22].
8. The tax system provides big breaks for the undeserving: (1) strongly disagree ...
(5) strongly agree [mean = 3.24; standard deviation = 1.04].
9. Special provisions in the income tax law that apply to only a few people
are unfair: (1) strongly disagree ... (5) strongly agree [mean = 3.15; standard
deviation = .97].
 IMPACT OF TAX FAIRNESS PERCEPTION DIMENSIONS ON TAX COMPLIANCE BEHAVIOUR 431

10. High income earners have a greater ability to pay income taxes, so it is fair
that they should pay a higher rate of tax than low income earners: (1) strongly
disagree ... (5) strongly agree [mean = 3.27; standard deviation = 1.21].
11. It is fair that high income earners pay proportionately more tax than low
income-earners. For example, if someone earning $100,000 pays 2 0% in taxes
($20,000), then someone earning $20,000 should pay less than 20% in taxes
(less than $4,000): (1) strongly disagree ... (5) strongly agree [mean = 3.57;
standard deviation = 1.08].
12. A fair tax rate should be the same for everyone, regardless of their income, for
example, if one person pays a 14% tax rate, everyone should pay a 14% tax rate,
whether they are wealthy or poor: (1) strongly disagree ... (5) strongly agree
[mean = 3.27; standard deviation = 1.21].
13. I get fair value for my income tax dollars in terms of benefits received from the
government: (1) strongly disagree ... (5) strongly agree [mean = 2.58; standard
deviation = 1.05].
14. The income taxes that I have to pay are unreasonably high considering the
benefits provided by the government: (1) strongly disagree ... (5) strongly agree
[mean = 3.8; standard deviation = 1.0].
15. The benefits I receive from the government in exchange for my income tax
dollars are reasonable: (1) strongly disagree ... (5) strongly agree [mean = 2.78;
standard deviation = .89].

Appendix B
Extracts from the 4-Item Non-Compliance Scale
Here are a number of statements that reflect what some people think
about certain aspects of taxation, especially income taxes. (Please circle
one answer in each line across as to how you feel about certain aspects of
taxation): 1 = Strongly agree; 2 = Agree; 3 = Neutral; 4 = Disagree; or 5
= Strongly disagree.
1. Since a lot of rich people pay no taxes at all, if someone like me underpays a
little, it's not a big deal: (1) strongly agree ... (5) strongly disagree [mean = 3.08;
standard deviation = 1.23].
2. Tax rates are just too high, so it is not really cheating when you find ways to
pay less tax than you are supposed to: (1) strongly agree ... (5) strongly disagree
[mean = 3.23; standard deviation = 1.07].
3. When you are not really sure whether or not you deserve a tax deduction, it
makes sense to take a chance and take a deduction anyway: (1) strongly agree
... (5) strongly disagree [mean = 3.28; standard deviation = 1.17].
432 (2005) 20 AUSTRALIAN TAX FORUM

4. With what things cost these days, it is okay to cut a few corners on your tax
return just to help pay the bills: (1) strongly agree ... (5) strongly disagree [mean
= 3.25; standard deviation = 1.06].

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